John Menzies - still a work in progress

John Menzies (MNZS.L): Back in March, I thought that the shares looked cheap at 387p on the reduced earnings and rebased (downwards) dividend. However, I was concerned that underlying trading was still lacking forward visibility leading to my taking a ‘wait and see’ approach. The market had no such qualms, with the share price breaching the 500p mark in July, before settling back to 475p today. So what progress can be seen in today’s interims, to 30^th June 2015? On a constant currency basis, turnover is up 2.1% year on year, whilst underlying pre-tax profits have fallen 17.9% to £17.0m. As the geographic profile of profits changes, so the tax charge has gone up from 27% to 32%. This has played its part in suppressing underlying eps of 18.8p, against 24.7p in the first half of 2014. As flagged in the March rebasing, the dividend is 5.0p against 8.1p. Whilst aviation turnover is up 8%, operating profits fell 29% to £9.4m, reflecting restructuring costs and contract churn. The recent loss of contracts in Spain will lead to further (non-cash) write-downs. Distribution performed well, with operating profits nudged up from £12.0m to £12.2m. This was despite the secular decline of print and losing the boost of 2014 being a World Cup ‘sticker album’ year. The recent acquisition of AJG Parcels is a next step towards growing their position in the e-commerce parcels market. The balance sheet continues to be in decent nick, with net debt of £120.8m, only up £7.4m despite the recent upheavals, in part reflecting good cash conversion of profits.

Clearly the re-booting of the group is not yet finished and both their aviation and distribution markets continue to be very competitive. The strategy is set on winning more large-scale hub and base aviation contracts, whilst also broadening the activities of distribution further into fulfillment and parcels. Overall, they forecast 2015 is to be second half weighted, although they do flag that recent weakening in currencies such as the Euro, Australian dollar and Czech koruna are a headwind. Consensus eps forecasts are for 46.5p, giving a PE of 10.2x, taking their guidance that the interim dividend of 5p is about 30% of the annual, a yield of 3.5%. These valuations do not look expensive, but the quality of the earnings is holding the share price back. There are signs here that the new management is making progress, but I would still only suggest clambering on board if you have a higher risk appetite. (Neil Cumming^, 18^th August 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower